Verisign: Expecting Modest Revenue Growth This Earnings Season

| About: VeriSign, Inc. (VRSN)
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VeriSign Inc. (NASDAQ:VRSN), the provider of registry services for all .com and .net domain names, will announce its Q3 2013 financial results on October 24. We expect moderate revenue growth for the company, which will be driven by an increase in .com/.net domain names. We believe the future growth rate in .com and .net domain names will be lower than the overall Internet domain name growth rate due to rising competition from country code domain names as well as other factors. Our moderate revenue growth outlook further stems from the the restriction on .com domain fee hikes until November 2018.

Recap of Q2 results

VeriSign reported net revenue growth of 12% annually in Q2 2013 to $239 million. Its operating margin rose from 50% in Q2 2012 to 55.2% in Q2 2013, owing to 12% and 10% fall in sales and marketing, and general and administrative expenses respectively. We expect the company's profitability to rise on an annual basis in the third quarter as well.

Market Share Of .com and .net Domain Names Is Forecast To Decline

The total number of registered domains in .com and .net was seen at 124.3 million at the end of Q2 2013, which represented a 4.9% annual and 1% sequential increase. The company had estimated the number of net additions to its .com and .net base in the third quarter to be between 1 million and 1.4 million. We estimate this figure to be somewhere around the high end of VeriSign's guidance, based on the updates posted to the zone daily by the company.

We believe the market share and .net domain names in overall Internet domains will come down from 48.1% (2012) owing to competition from country code domain names as well as pending introduction of new gTLDs.

Renewal rate will be tracked

The domain name renewal rate decreased to 72.4% in Q2 2013 from 72.9% in the same quarter last year. This decline was attributable to economic challenges in Europe and changes made to search algorithms by Google (NASDAQ:GOOG), which negatively affected monetization on certain domains. It will be interesting to see where the figure stands in this quarter as we expect this metric to see some stabilization in the near-future.

Update on New gTLDs Will Be Seen

Internet Corporation for Assigned Names and Numbers (ICANN) plans to expand the gTLD universe, with the addition of around 300-1,000 new gTLDs annually. VeriSign has applied for 14 of these new gTLDs, and applicants for around 220 new gTLDs had originally chosen VeriSign to be their back-end registry services provider. While these applications are expected to open new revenue streams, no significant revenue from these new gTLDs (if any) is forecast before 2014. We will track updates on the ICANN approval process during the earnings call.

We will update our price estimate for VeriSign's stock after the earnings release.

Disclosure: No positions